Taking Advantage of the World Crisis

The world crisis is serious this time. Two of the world economic powers, the United States and Europe, have become the trigger. On Oct. 4, Ben S. Bernanke, the chairman of the U.S. Federal Reserve, implied in his testimony to the U.S. Congress that the U.S. is like somebody who has drank too much and is close to faltering because of his disorderly situation.

Bernanke signaled that in addition to the crisis in Europe that stymies U.S. economic growth, the internal condition of the U.S. is fragile, especially when it comes to the job market. “Unless the European situation is brought under control, it could be a much more serious situation for the U.S. economy,” said Bernanke, according to an Oct. 4 Bloomberg report.

The U.S. government, according to Bernanke, need to prepare strategic steps to alleviate the worst impact of the world crisis. Therefore, the Fed has prepared special steps to support the U.S. government’s effort to solve its problems. However, Bernanke sees that it is not easy to realize those steps because the problem does not only worsen the economy, but also the political conditions in the U.S. and more than 17 members of the European Union.

“The problems there are not really economic, they're political,” said Bernanke. “Because what they are trying to do is find solutions that are acceptable to 17 different countries, which you can imagine is very difficult.”

Until today, there is no concrete action from the European Union members. Each EU country has not shown a good commitment to solve its problems, especially regarding economic aid to Greece, which is on the verge of default. Nonetheless, Greece is not the only one to come so close to danger; Portugal, Italy, Ireland and Spain also cannot breathe easily.

It is reasonable that the crisis in the U.S. and Europe affects the economy of other countries. Until 2010, the U.S. and Europe were the greatest economic players in the world. Data from the World Bank shows that the gross national product of the United States is the highest in the world a $14.582 trillion, or 19.1 percent of the global GNP, while the European Union’s GNP is worth $11.3572 trillion, or 14.9 percent.

The two economic powers below them, China and Japan, also influence the fluctuations of the U.S. economy. According to Bernanke, the Japanese earthquake and tsunami have had an impact on the U.S. economy. China keeps dominating the U.S. currency trade.

It seems that the problems in the U.S. and Europe have impacted the world economy. Sunarsip, Chief Economist at the Indonesian Economic Intelligence, points to a slowdown in the world’s economic growth, as can be seen in data from the global Purchasing Managers Index (PMI). According to Markit, the JPMorgan Global Manufacturing PMI fell to 51.5 in August. This condition indicates a big turnaround in the growth profile of the manufacturing sector when compared to the peak of 59.1 in February.

According to Sunarsip, the PMI is the lowest in the last two years since the PMI stayed above the neutral limit of 50.0. Referring to this trend, it is predicted that the global economy will still be under pressure in 2012.

In June 2011, the IMF kept its forecast for global growth at 4.3 percent in 2011, saying that it will rise to 4.5 percent in 2012; it noted that the projection can be realized if China’s economy grows by 9.5 percent. In fact, this expectation has changed so drastically that on Sept. 19, IMF changed its projection to 4 percent, also noting that the economic growth in China should surpass 9.5 percent.

Opportunities and Threats

Will the crisis in the U.S. and Europe give Indonesia an advantage, or will it devastate its national economy?

For sure, there are people who agree and disagree. Nevertheless, those who think Indonesia can benefit from the crisis say this will only happen if some serious requirements are met. For example, Minister of Finance Agus Martowardojo believes that Indonesia will not be impacted by the great crisis. However, he judges that it is not easy for Indonesia to create its shield. There are some special requirements which should be fulfilled.

“If we can maintain the security stability and adhere to the practice of corporate governance based on the international practices, then the impact of the European crisis will not reach Indonesia,” said Agus.

This is a difficult requirement for Indonesia because this country is still failing to show good management. Corruption and the leak of the state budget are proof of bad governance.

However, the World Bank gives a positive signal. According to the organization, Indonesia is strong enough to withstand the impact of the U.S. and European crisis. World Bank's country director for Indonesia, Stefan G. Koeberle, has mentioned that Indonesia will be among major emerging economies.

The reason, according to Koeberle, is that the economic growth in Indonesia is supported by a good fiscal system and prudent budget management. Another factor is the fast-growing middle classes, which can encourage higher consumption.

That's the positive factor. However, Koeberle has some negative words which the government should pay attention to. He claims that there is still too much trouble in this country to realize better economic growth.

Koeberle explained that the government must provide jobs and allocate money from the budget for infrastructure and education. If these conditions can be fulfilled, Indonesia will have higher growth. Otherwise, we cannot pursue that target.

Sunarsip is among those who are pessimistic about Indonesia’s chances of avoiding the crisis. He refers to the worsening global economy and financial market.

Sunarsip cites the decline in Jakarta Stock Exchange Index since August. Indonesia was safe thanks to the fundamental macroeconomic condition and strong micro-emitters, which minimized the index correction.

The monetary authorities are cautious about the crisis. Indonesia's central bank maintained the benchmark rate at 6.75 percent, although it has the chance to cut the rate. The central bank also decided to widen the lower band of the interest rate corridor for monetary operations from 100 bps to 150 bps below the benchmark rate.

Some analysts assess the fluctuation in the currency exchange between the Indonesian rupiah and U.S. dollar as proof that Indonesian economy is affected by the worsened conditions in the U.S. and Europe. Indonesia is unstable because its foreign exchange reserve is not as high as other countries, especially China.

Currently, the foreign exchange reserve in Indonesia is only $122 billion. This reserve will decline because the government has to pay its foreign debt.

There are many loopholes that leave Indonesia vulnerable to the wave of the U.S. and European crises. Indonesia's central bank has realized a loophole. The Director of Research and Monetary Policy in the central bank, Perry Warjiyo, admits that every institution in Indonesia already has systems and mechanisms to overcome the crisis. However, they all work separately; the government works by itself and the central bank works by itself. They still lack an integrated system.

“Fresh Wind” from Foreign Investment

Indonesia should be able to make the economic disorder in the U.S. and Europe an investment opportunity. The solid fundamental macroeconomics and microeconomics can become an asset for Indonesia to ensure foreign investors. Don't let this country become a market for foreign products when foreigners don't want to invest their capital or develop their industries here.

Indonesia can benefit from the tenuous relation between the United States and China. At the very least, this is a chance to increase the trade balance between Indonesia and the U.S and between Indonesia and the European Union countries.

Another strategy is to increase foreign capital investment. The opportunity to increase capital investment from the U.S. is quite big. According to the Indonesia Investment Coordinating Board, until March 2011, the investment from the U.S., worth $351.1 million, was the second largest part of foreign direct investment in Indonesia, after Singapore's $1.138.8 million. This means that U.S. investors have high confidence in Indonesia, as do European countries such as England, Germany and the Netherlands.

What has become appealing to foreign investors? According to the Indonesia Investment Coordinating Board, there are five main sectors: food crops, livestock, forestry, fisheries and mining. If we can increase the facilities, infrastructure and supporting infrastructure, the foreign direct investment will certainly increase.

The head of the Indonesia Investment Coordinating Board, Gita Wirjawan, believes in Indonesia’s potential. There are many countries that juxtapose Indonesia with the members of BRIC (Brazil, Russia, India and China). In fact, Indonesia ranks the first among Asia-Pacific sovereigns by Standard & Poor's for good fiscal balance. In January 2010, Fitch Ratings upgraded Indonesia's credit rating to BB+ with a stable outlook.